7 Ways to Increase Your Negotiation Leverage
Delivering savings for the organization is a key function of procurement department. Granted, there are other areas where procurement adds value, but that is a subject for another blog post.
The Savings delivered as an outcome of an Sourcing event, could vary based on the factors impacting your negotiation leverage or your position on the negotiation table. Certain factors which impacts the outcome are
Supply and Demand mix: Number of suppliers in the mix impacts your outcome. Sometimes less competition could lead to lower savings, but that might not always be true. There are cases where you probably would be single source by design (for example certain technology), in that case other techniques like long term contracts and supplier development should be used.
Time : How fast you need to select a vendor. More the time available, better the outcome.
Having said that, let’s delve into measures you can take to positively impact the factors mentioned above and increase your leverage or in others words ability to influence the outcome, which in this case is negotiated savings .
1. Get ahead of the curve
One of the key aspects which determine the output of negotiation is the time available to run the evaluation process. The more time you have available, the better job you will be able to do in identifying sources, creating an evaluation structure and vendor selection.
But that is not the case always, sometimes the stakeholder/internal customer will come to you at the last minute and you have limited to no time to execute an RFP. Definitely, that is not a desirable situation but I believe it happens more often than you would like.
One way to avoid this to have periodic reviews with the stakeholders, on what their needs are and what support you need to provide. A recurring monthly meeting is a good way to keep track of the upcoming needs.
The other way is to review the contracts coming up for renewal. If you have a centralized contract repository, then it becomes very easy to track the contract expiration schedule. Once you know what is up for renewal, it is a matter of reviewing those contracts with respective budget owners and plan the next steps.
2. Advance Planning
Another way to get ahead of the curve is to have a budget review meeting with the stakeholders, after the budget for next year has been finalized.
So to start with, you should know what your company budgeting cycle is. Don’t worry if you don’t know that, you can always ask your colleagues in Finance department.
Once the budget has been established, you can work with respective budget owners to identify opportunities for sourcing savings. Typical things to ask
- What is the planned timeline for the purchase of item/s in the budget.
- Whether this is a new purchase or additional purchase of a similar product
- Whether the purchase will happen together or over a period of time. For example, Software vs. typical consumables.
- Any anticipated change which can either accelerate the purchase or extend the timelines of the purchase.
Once that is done, create a list of all the identified sourcing opportunities. If you are managing a team then assign the respective opportunities to the individual category leads and make sure that they review the opportunities on a periodic basis with stakeholders.
3. Increased Competition
More number of suppliers competing for your business, the better it is. A well defined supplier discovery process, will ensure that there is a good supplier mix.
- Define a high level criteria for including vendors in your sourcing event.
- Analyst research reports is a good starting point to find suppliers in any category, Gartner especially is a good source for identifying key players in Technology and Services category.
- You can leverage LinkedIn to do your research on suppliers, how to use LinkedIn for supplier discovery is a topic for another blog post.
- Leverage supplier networks like Ariba for supplier discovery.
- Another way to find suppliers is to look for conferences/events for that domain, and look for sponsors of that event.
- Search engines like Google can be an effective source of suppliers.
Make sure that you keep the suppliers to a manageable number. More the number of suppliers,more work is required to evaluate their responses and create the shortlist.
4. Requirement Standardization
It is great to have more suppliers, but if your specifications are so stringent that only one or two suppliers can meet your requirements,then having more suppliers may not result in desirable outcome. To avoid situations like this, work with stakeholders to understand the must have and nice to have requirments. Also categorize requirements into different buckets like functional, performance, physical attributes etc.
Categorization of requirements in this fashion not only helps in understanding the criticality of requirements but also helps in developing a better scorecard for supplier evaluation.
5. Effective Negotiation
There is lot written about effective negotiations and how to negotiate, so I will not go deeper into that. However, there are few key points I would like to mention
- Make sure the stakeholders are involved in the negotiation.
- Make sure that you control the communication. Several vendors try to reach the stakeholders to get inside scoop on what’s going on in the decision making process. Ensure that doesn’t happen and all communication should be handled by sourcing person running the RFP. The best way to control this is to include communication rules and guidelines in your RFP.
- Prepare for your negotiation meeting, make a list of open issues, criticality of issues and your team's position on critical items.
6. Build your own Supplier network
There is no secret that more the competition, better your leverage and hence better outcome. However sometimes it could be challenging to find good suppliers.At the same time you also don’t want to keep on adding new vendors for small savings, becuase those savings can easily be offset by the process cost like setting up contract and setting up them in your ERP system as a vendor.
As they say in job search, the best time to build your network is when you are not searching for a job, same is true for suppliers. The best time to build your internal supplier network is when you are not chasing a tight deadline for RFP. Couple of things to stay ahead of the curve
- Keep a capability matrix for your existing vendors. You can manager through vendor classsification.So essentially there should be two set of spend classification codes which you can assigned to a supplier. One for categories for which you are buying and other for categories which they can potentially supply in the future. If your company has a supplier information management system, then it is very easy to keep a matrix of supplier capabilities.
- Convert vendor cold calls: The good part of being in Sourcing that vendors are always trying to reach you in hope of finding opportunities to sell their product or services. Most of these cold calls ends up in you telling them that there are currently no opportunities and let's stay in touch. Instead, have a internal register of potential suppliers, encourage suppliers to provide more information about their business, capabilities etc. If possible tag these potential suppliers in your internal spend categories so that finding them during the RFP process is easy.
Some companies use vendor portals where existing vendors as well potential vendors can register, that is a great way to build your supplier network.
7. Long term contracts
Long term contracts are common in direct materials due to the strategic nature of the vendors. However, the same technique can be used while negotiating Indirect Spend contracts.
Now you may say, long term contracts might give me a lower price but if the market price drops for the product/service then we are struck with a long term contract. There are some possible ways to mitigate that risk
- In the contract, ask for a right to benchmark vendor price with the market, It is common to have a benchmarking done every 18 months if not 12 months. You should ask for termination of contract if the price difference is more than certain % over what you are paying them. Again there is no fixed percentage given that it varies from category to category.
- Negotiate a pricing for a lower commitment in case your business direction changes and you probably need lesser quantity than committed. Again, negotiate it upfront when you have the negotiation leverage.
Hope this helps, Feel free to share your favorite hacks which you use to improve negotiation leverage.